Outsourcing: Offshoring to China: What Should Your Model Be?

By relocating operations overseas, life sciences companies expect to save costs, enjoy government incentives, benefit from modern industrial parks (as foreign governments make heavy investments in building incubators and industrial parks for the life sciences sector), and profit from a highly skilled labor force composed of returnees—people who have returned to their home countries after training in North America and Europe. With the wages of scientists 60 to 70% lower than those of their American and European counterparts,1 many Asian vendors offer cost savings as high as 60% in areas such as basic chemistry or clinical trials.

China, of course, is a key location for offshoring. With a GDP greater than $8.8 trillion, China is now the third largest economy of the world. At the same time, direct foreign investment in China has risen considerably in the last few years, to almost $70 billion in 2003, as Western and Asian companies have moved some of their traditional industrial activities there.2

Thus, many Western companies believe there are numerous long-term benefits to offshoring operations. But companies entering the Chinese market face a number of challenges. Besides the language and communication issues, there is an emphasis on short-term, profits and an inadequate enforcement of intellectual property (IP) regulation,3 and heavy state intervention for projects setting up in China. These concerns have led many companies to choose an offshoring strategy carefully before entering the Chinese market.4

Three major models have emerged for offshoring to China (Table 1). The first is the classical offshoring model, in which a company works with a local partner who acts as an intermediary. In the second model, two companies work together through a joint venture. The third model involves direct investment by the Western company, which acquires existing infrastructure or constructs new facilities. The three case studies that follow illustrate these three models.

MODEL 1: CLASSICAL OFFSHORING

Quick Recap

O-Two Medical Technologies (
http://www.otwo.com/) produces devices for emergency respiratory care. Although the company is based in Toronto, Canada, its products are distributed worldwide, and the company has a long tradition of offshoring to Taiwan. Last year, it began sourcing product from China as well.

O-Two has a classical offshoring process. O-Two supplies design specifications to its Chinese partner, who manufacturers the products and sends them back to North America. O-Two has not made any capital investments but, as occurs in all Chinese collaborations, there is a heavy investment in relationships.

Because the products offshored include proprietary devices, IP protection is key. "Copying is rampant in China, so you need to spend a lot of time selecting your partner," says Win Van Voorst, O-Two's chief operating officer. To reduce this concern, O-Two elected to work through a trusted Taiwanese partner who already handles O-Two's manufacturing in Taiwan. Van Voorst has found that in his experience, Taiwanese business executives are accustomed to both Western and Chinese cultures, which makes them ideal intermediaries. Thus, this collaboration not only helped alleviate IP worries, but helped sidestep communication and quality issues as well.